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Tuesday, March 30, 2010

When world famous speculator George Soros made one billion dollars back in 1992 he bet that the British Pound would plummet. He knew that Britain would be forced to pull out of the Exchange Rate Mechanism, a system of fixed exchange rates that existed in Europe at the time. Pressures had been mounting in the British economy and it was forced to de-peg its currency from the other European currencies and allow it to float freely in order to avoid skyrocketing interest rates and an economic crash.

Soros shorted the Pound and cleaned up to the tune of ONE BILLION DOLLARS!

A similar thing is about to happen with the euro, only much, much, bigger!

Friday, March 26, 2010

Most economists have this totally wrong. They believe that if the dollar loses its role as the reserve currency, then it will collapse. In fact, it's exactly the opposite.

The dollar's reserve currency status is part of what keeps it weak. It MUST supply the currency to those around the world who wish to hold it or use it for transactional purposes. Therefore the U.S. runs trade deficits--not by its own design--but as a consequence of other nations exporting to America to acquire dollars. (They need dollars to pay for oil, for example.) On balance the U.S. imports more than it exports because there is a desire by the rest of the world to "net save" in dollars. Were that not the case the dollar would be scarce and, therfore, fetch a higher exchange rate.

March 26 (Bloomberg) -- JPMorgan Chase & Co., Lehman Brothers Holdings Inc. and UBS AG were among more than a dozen Wall Street firms involved in a conspiracy to pay below-market interest rates to U.S. state and local governments on investments, according to documents filed in a U.S. Justice Department criminal antitrust case.

More evidence of Wall Street's criminality. The financial sector has become like a cancer on the economy. It needs to be shrunk dramatically. Many of these firms should be shut down. (At least Lehman's gone!)

And to think, Jamie Dimon has been considered a front runner for Treasury Secretary at times. Not surprising considering who's in there now!

Thursday, March 25, 2010

The euro is becoming more of a joke every day. Why it fetches anything in foreign exchange markets is beyond me.

Today Germany's Chancellor, Andrea Merkel, said that the IMF would be needed as part of a Greek bailout.

The IMF!!!

Wasn't that the organization that was brought in time and again to inflict suffering and destroy small, emerging economies with its ridiculous austerity plans?

The sight of the Eurozone, with a total economic output larger than the U.S. calling in the IMF to help one of its neighbors would be like America turning to the IMF to bail out California. Americans would go livid at the very idea!

Yet that is the stupidity that is currnetly going on and, yet, the euro is still amazingly 30% stronger than the US dollar. (Whoever said markets were rational??)

Think about it...what is the total balance sheet of the IMF anyway? Possibly $500 billion, if that? And it's being asked for help when the Eurozone has a $15 trillion economy!!!

Moreover, the IMF is not a currency issuer. I cannot "print" euros as the ECB can to help member states. The whole thing is getting to be like a Marx Brothers comedy.

ANYONE who reads this blog is INFINITELY more informed and capable of solving Europe's problems than the current leadership over there. (That's why you'll never get the job!)

Here's the problem, though. The same, idiotic mentality is pervasive in the U.S. I've even heard some lawmakers talk about America possibly needing help from the IMF. (Maybe that dope, Judd Gregg.)

Two things are for sure:

1. Unless Europe gets its head out of its ass soon, the euro will be worthless. (See how you can make money on that, here.)

2. Things are not likey to get materially better in the U.S. anytime soon.

Yesterday (3/24) I was on Fox and we had Kansas City Fed President Thomas Hoenig on and he was talking about the need to reverse the "extraordinary measures" that the Fed has taken since the crisis because it raises the potential for huge inflation.

Specifically, Hoenig spoke with great concern about how the Fed must sell off its huge portfolio of mortgage backed securities.

I sat there listening to this guy, utterly dumbfounded that he does not even understand basic monetary operations.

From his comments one could surmise that Hoenig believed the purchase of MBS was nothing more than some kind of irresponsible speculation--a position the Fed took for monetary gain--which it now has to carefully sell in order to "book" the profits.

He should know that the Fed's purchase of mortgage backed securities was the way by which it sets interest rates. To get mortgage rates down, the Fed needed to purchase MBS and that's what it did. It was not a "trade."

The Fed's purchase of securities--whether they be MBS or Treasuries or anything--is always the mechanism it uses to manipulate reserve balances higher and that puts downward pressure on rates.

"Exiting" is achieved by simply doing nothing, because the Treasury's ongoing sales of securities functions to drain reserves automatically. In the last six months the Treasury has sold nearly $4 trillion of securities. That is nearly four times the current level of system reserves!

It is very disturbing that such a high level monetary official is so lacking in knowledge when it comes to basic operational realities of the Fed and government finance.

Monday, March 22, 2010

CNBC interviewed St. Louis Fed President Bullard this morning. This is the video below. It's a bit of a long clip, so if you are interested only in his comments with respect to exiting the "Quantitative Easing" aka Credit Easing, fast forward to the 11:00 mark.

There is a massive preoccupation in the financial media with this so called "exit strategy". The Fed is of late very accommodating in addressing these concerns.

March 22 (Bloomberg) -- The bond market is saying that it’s safer to lend to Warren Buffett than Barack Obama.

Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe’s Cos. debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an “exceedingly rare” event in the history of the bond market.

Read this and if you still believe that markets are rational then I've got a bridge to sell you.

Markets are a function of the actors that comprise them. If the belief systems that mold the behavior of those actors is based on myth, fallacy or just plain ignorance, then the market's behavior will mirror that.

In a rational world there is no way in hell that corporate bonds of any kind shoiuld be yielding less than those of a sovereign, currency issuing nation. Yet, that is exactly what we are seeing because the participants believe that the U.S. has too much debt or that it can go bankrupt, when if fact there is absolutely no chance of that.

No matter how financially secure Warren Buffet's firm is, it is infinitely more risky than the U.S. Government because at the end of the day Berkshire Hathaway cannot simply credit bank accounts to meet all payments.

This is a clear indication of an old saying: "Garbage in, garbage out."

Investors believe this garbage about the U.S. going bankrupt and they seem to trust Warren Buffet even more. Were it not for the fact that the idiot rating agencies will soon downgrade U.S. debt (I absolutely believe this), arbitraging Bershire bonds against Treasuries (sell the former, buy the latter) is probably the greatest trade of all time!

Saturday, March 20, 2010

A friend of mine brought this article to my attention. It came from a magazine published back in 1931.

Gold Does Not Make Prosperity To men, as to nations, the possession of gold is a symbol of prosperity. Let's see. The United States has more gold than it ever had-and less prosperity. The banks are bursting with gold and barely meeting their dividends. Our great corporations have immense reserves of gold and their business is dwindling. All the nations are sending gold to us and our business with them is fading away. The truth is that large accumulations of gold are an inverse measure of prosperity.

Probably four-fifths of the gold in the Federal Reserve banks is idle - and nobody ever contended that idleness makes for prosperity. The fact is that except as it is used as the basis of bank credit, gold has no relation to prosperity. But when there is no business, there is no credit and gold is useless. In other words, business gives gold a utility value. Gold is dead until vitalized by commerce.

The piling up of gold in any country does not signify that is is prosperous; it merely shows that the country is giving other countries more goods than it receives; that it is parting with more usable wealth than it is getting back.

Today the United States is receiving gold and going without goods it would like to have. And because it is receiving gold it is selling less than it would liike to. When we are prosperous, which means that credit is being freely extended, we need gold because it is the one commodity that mankind has agreed to accept on balance in place of the goods it would rather have. It is merely a balancing item in the offsetting of credits against debits. It might be epigrammatically said that prosperity "makes" gold and "unmakes" it instead of gold making or unmaking prosperity.

The highlighted section can also be applied to export policies, in which a nation sends away its real wealth for a worthless asset, namely, a non-convertible currency of another nation. And this is exactly the direction we are headed because of false beliefs about debt and deficits.

The idea that gold's value comes from economic output and wealth creation, not the other way around, is instructive. You can substitute "money" in place of gold and then you will understand that money is created from the growth in the economy, not by the cental bank. That is to say it is created endogenously: the monetary authorities MUST supply the amount of money demanded by the public. It has no choice. The public, therefore, has control over the money supply.

Friday, March 19, 2010

A defeat of health care on Sunday could be disastrous for stocks and it has nothing to do with whether health care reform is good or bad.

Rather, a defeat would mean that the president has been fatally wounded, politically. That means it would be doubtful that he could pass a single legislative initiative in the remainder of his term. The nation would be left essentially without a leader. It's tremendously destabilizing and the markets would react accordingly.

No never of course on the real battlefield, but it looks like the US Military is now starting to take notice and perhaps be "captured" by the mainstream view of "debt" and deficits.

This link is to a recent document published by the U.S. Joint Forces Command titled: 'Joint Operating Environment 2010'. This year USJFC has included a section on "Economics". Here are some choice excerpts:

“The dollar’s “extraordinary privilege” as the primary unit of international trade allows the U.S. to borrow at relatively low rates of interest. However, the emerging scale of U.S. Government borrowing creates uncertainty about both our ability to repay the ever growing debt and the future value of the dollar. Moreover, “any sudden stop in lending…would drive the dollar down, push inflation and interest rates up, and perhaps bring on a hard landing for the United States…”

“if current trends continue, the U.S. will be transferring approximately seven percent of its total economic output abroad simply to service its foreign debt.”

“Interest payments, when combined with the growth of Social Security and health care, will crowd out spending for everything else the government does, including National Defense.”

“Habsburg Spain defaulted on its debt … its overseas empire collapsed. Bourbon France became so beset by debt due to … its overthrow by revolution. Interest ate up 44% of the British Government budget …..inhibiting its ability to rearm against a resurgent Germany. Unless current trends are reversed, the U.S. will face similar challenges…..going to pay interest on the money borrowed to finance our deficit spending.”

It appears that the USJFC did not come to these conclusions on their own. The report cites many references to mainstream organizations and authors. Among them are: Peterson-Pew Commission (key word here being 'Peterson'!), Heritage Foundation, 'The Old' Paul Krugman, Niall Furguson, World Bank and others.

I have to this point taken some solace in the fact that our Military had never shown any evidence of overt acceptance of these dangerous beliefs. I will try to provide a more detailed review and some counterpoints to some of the report over the next few weeks.

The stakes in this intellectual 'war' between the mainstream and modern monetary theories are being raised.

Thursday, March 11, 2010

Serious violence is erupting in the streets of Athens as people protest forced austerity measures being imposed upon them. The very fabric of society is unraveling and it is getting uglier by the day.

For what reason?

For some arbitrary deficit target that is being imposed by bureaucrats in Brussels? Is this sufficient cause to destroy a society?

See how irrational this is? The leaders of Greece are forcing terrible conditions on the citizens of their own country because of something that is totally arbitrary. As a result there is violence, the loss of jobs and people going without the means to support themselves.

This is nothing short of tyranny, but it's a self-imposed tyranny. Greece can escape from its troubles in a heartbeat, by simply exiting the euro and becoming a currency issuer once again. Yet ego, shame and all other kinds of negative and irrational emotions and self-imposed limitations will not allow this to happen. Instead, Greece has chosen a path that will devolve into total chaos and anarchy.

The United States faces similar turmoil, not because the U.S. is no longer a currency issuer, it is, but because it is embracing policies based upon ignorance and limitation. By forcing ourselves to adhere to some arbitrary and meaningless standard about deficits we allow millions of people to remain unemployed, perhaps without food or with the loss of their homes and places of residence. It's a form of tyranny.

Chaos of the order seen in Greece may not happen in the U.S. because there are so many layers of police and law enforcement in this country. However, a police state could be imposed if things get bad enough and it is certainly heading in that direction. You simply can't have millions and millions of people unemployed and not expect them to rise up in protest at some point. Especially when speculative finance capitalists have free rein to loot the nation's assets and wealth.

Wednesday, March 10, 2010

There was a story that appeared in the WSJ last week about how the Justice Department was investigating a number of large U.S. hedge funds to see if they acted in concert to drive down the euro.

This is an example of how misguided and backward our policy has become.

First, the idea that a handful of hedge funds can manipulate the euro, a currency based on an economic zone whose output is bigger than the entire output of the U.S. is patently ridiculous.

But if it's true that a half dozen or so hedge funds did collude to push the euro down then the Justice Department's reaction seems hypocritical. That's because it didn't seem to have any problem when hedge funds and other speculative entities pushed down the value of the U.S. dollar, or drove up the price of gasoline or heating oil or wheat or corn or sugar in the past several years, causing Americans to suffer when they were already suffering from job loss and a dire economy.

Seriously, where was the Justice Department then?

Are they saying to us that it's okay if this stuff happens to Americans, but watch out if the Europeans fall prey to speculative attack? Do European workers and families have more rights than Americans? No other conclusion can be drawn when you look at the response.

Perhaps it's all part of the current administration's desire to be loved by the rest of the world. That makes it okay for Americans to suffer, but not Europeans? And we are the ones responsible??

I am against just about everything that hedge funds stand for these days. They're dangerous and what makes them dangerous is that they comprise huge pools of money that are run by people who don't have a clue of what they are doing. It's like giving firearms to children. They're a bunch of gunslingers and they've created a Wild West type of atmosphere where innocents get hurt or even killed!

Contrary to what you hear from industry associations and from the halls of academia, heldge funds don't do any good at all. All that tripe about providing liqudiity and assuming the risk that regular businesses don't want to assume is just baloney. Hedge funds make markets illiquid by either distorting fundmaentals and manipulating prices or their activities raise risk and volatility making it more difficult for long-term investors and businesses who need stable conditions in which to save and invest.

What's ironic in the case of the euro, however, is that this could have been the one time that hedge funds' activities proved beneficial. With Greece and the other peripheral countries facing imminent financial and economic collapse and with the prospect of any meaningful bailout unlikely (there is no overriding fiscal authority in Eueope that can do that) a lower euro would have helped to assuage the situation by keeping exports strong. That would have been the one bright spot in an otherwise dismal picture. The crisis could have been averted. And if the hedge funds were the reason for that, then they should have been congratulated, not made the target of investigations.

Monday, March 8, 2010

The Prime Minister of Greece is here in the US this week and gave a speech this morning at the Brookings Institution.

The speech mostly focused on economic issues facing Greece and the EU in general. He is very articulate and provides harsh accusations of the negative effects that speculation has had on the economic situation in Greece and perhaps some other EU countries. I'm sure this topic is high on his list of items for discussion with US officials this week.

In what I think to be a related matter, the EU announced their plans to form a "lender of last resort" for the Eurozone (I thought that's what central banks were for?!), in the form of an IMF style lender of Euros, and a crackdown on derivatives.

Wednesday, March 3, 2010

Many items in the Federal Budget are "non-discretionary" meaning that Treasury authority to spend for these items is not a voted appropriation every year. Many are probably familiar with the major entitlement programs such as Social Security and Medicare, the appropriations for these two major programs that account for a large percentage of Federal spending are actually not voted on by the Congress, they are part of non-discretionary spending. The amounts that recipients receive is based on past amounts, annual COLAs are computed by BLS and Treasury automatically adjusts the deposits made to the enrolled citizens.

Another item that is not voted on is the interest the Federal government pays on the "debt", that is interest on Treasury securities. From Wikipedia: "Funds to make federal interest payments have been automatically appropriated since 1847". So Congress has not voted on paying the interest on the "debt" in 163 years! The Treasury Dept. has enjoyed 163 years of autonomy in arranging these payments.

I wonder if the debt doomsday crowd realizes that for the US to default on it's interest obligations, the Congress and the President would have to take a positive action to pass completely new legislation that would overturn a law that has 163 years of legal precedent?

For the past 30 years Republicans have espoused the virtues of "supply side" economics, but now it appears they have become staunch defenders of the demand side of the equation, at least insofar as it applies to the current jobs crisis.

One by one, Republicans in Congress are coming out against any further extension of unemployment benefits even as tens of thousands of jobs continue to be lost each month and as families in their own states struggle desperately to survive. Their new argument is that unemployment benefits give an incentive for people not to work.

Somehow they beleive that the problem is one of demand for jobs, not the fact that the supply of jobs has been getting destroyed, mainly due to their obstructionist policies and their stance on deficits.

The Republicans are attempting to spin this argument in a dishonest and cruel way, by saying that the only reason so many people are collecting unemployment now is because they simply aren't looking hard enough. In their minds, the mere desire for a job is sufficient to somehow miraculously gain employment regardless of actual economic conditions.

People don't get unemployment benefits if they quit their jobs; they have to be laid off, so it was the laying off part that got them on the dole in the first place. Furthermore, it's audacious to argue that getting $25,000 per year (the full unemployment stipend), which most people don't even qualify for, is incentive to not look for work when the median income in America is well above that.

Blocking the extension of unemployment benefits has caught Congressional Democrats offguard (I don't see why it should have) and now the first "trickle down" effects will start to be felt as thousands of government workers are furloughed or as others around the nation miss a paycheck this week. This will inject some new weakness into the economy just as Wall Street and the media are heralding its recovery.

Mike has blogged here recently about the dangers of CDS and the potential for manipulation. Last week Chaiman Bernake was questioned by Congress about the role CDS may be currently playing in destabilizing debt securities markets in Europe. The Chairman responded: "Using these instruments in a way that intentionally destabilizes a company or a country is — is counterproductive, and I’m sure the S.E.C. will be looking into that.”

So CDS are Exempt Securities. Exempt Securities is a "term of art" in securities regulation, any securities regulator would be able to rattle off the definition in an instant. Many issuers specifically seek such an exemption in order to avoid costly SEC oversight. Apparently Ben Bernanke does not know what they are, he apparently thinks that the SEC regulates all securities (not the exempt ones Ben!).

How can the sitting Chairman of the U.S. Federal Reserve System not know what Exempt Securities are? Or at least in this case he does not know that CDS are exempt? (Ben, try Wikipedia!) What does he spend his time on? After all of this time and the grief the Fed has suffered due to AIG's CDS, and he doesn't know they are exempt? Couple this with his previous statements about (to paraphrase) "banks lending out reserves" and one has to wonder what his qualifications are to have his job. I've heard he is an expert on the Great Depression, which may be where his ignorance has us headed again.